Wednesday 30 October 2013

Antiques ‘R’ Us is a mature manufacturing firm. The company just paid a dividend of $10.80, but management expects to reduce the payout by 5.25 percent per year, indefinitely. Required: If you require a return of 9 percent on this stock, what will you pay for a share today? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Current share price $ Explanation: The constant growth model can be applied even if the dividends are declining by a constant percentage, just make sure to recognize the negative growth. So, the price of the stock today will be: P0 = D0 (1 + g) / (R – g) P0 = $10.80(1 – 0.0525) / [(.09 – (–.0525)] P0 = $71.81

Antiques ‘R’ Us is a mature manufacturing firm. The company just paid a dividend of $10.80, but management expects to reduce the payout by 5.25 percent per year, indefinitely.
 
Required:
If you require a return of 9 percent on this stock, what will you pay for a share today? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
   
  Current share price $  


Explanation:
The constant growth model can be applied even if the dividends are declining by a constant percentage, just make sure to recognize the negative growth. So, the price of the stock today will be:
 
P0 = D0 (1 + g) / (Rg)
P0 = $10.80(1 – 0.0525) / [(.09 – (–.0525)]
P0 = $71.81

Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next eleven years, because the firm needs to plow back its earnings to fuel growth. The company will then pay a dividend of $15.00 per share 12 years from today and will increase the dividend by 5.50 percent per year thereafter.

Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next eleven years, because the firm needs to plow back its earnings to fuel growth. The company will then pay a dividend of $15.00 per share 12 years from today and will increase the dividend by 5.50 percent per year thereafter.
 
Required:
If the required return on this stock is 13.50 percent, what is the current share price? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
   
  Current share price $  


Explanation:
 

The stock price of Webber Co. is $53.80. Investors require a return of 12 percent on similar stocks. Required: If the company plans to pay a dividend of $3.55 next year, what growth rate is expected for the company’s stock price? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Growth rate % Explanation: We need to find the growth rate of dividends. Using the constant growth model, we can solve the equation for g. Doing so, we find: g = R – (D1 / P0) g = .12 – ($3.55 / $53.80) g = .0540, or 5.40%

The stock price of Webber Co. is $53.80. Investors require a return of 12 percent on similar stocks.

Required:
If the company plans to pay a dividend of $3.55 next year, what growth rate is expected for the company’s stock price? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

  Growth rate %  



Explanation:
We need to find the growth rate of dividends. Using the constant growth model, we can solve the equation for g. Doing so, we find:
 
g = R – (D1 / P0)
g = .12 – ($3.55 / $53.80)
g = .0540, or 5.40%

Nofal Corporation will pay a $4.35 per share dividend next year. The company pledges to increase its dividend by 5.5 percent per year, indefinitely. Required: If you require a return of 9 percent on your investment, how much will you pay for the company’s stock today? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Current stock price $ Explanation: Using the constant growth model, we find the price of the stock today is: P0 = D1 / (R – g) P0 = $4.35 / (.09 – .0550) P0 = $124.29

Nofal Corporation will pay a $4.35 per share dividend next year. The company pledges to increase its dividend by 5.5 percent per year, indefinitely.

Required:
If you require a return of 9 percent on your investment, how much will you pay for the company’s stock today? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)


  Current stock price $  


Explanation:
Using the constant growth model, we find the price of the stock today is:
 
P0 = D1 / (Rg)
P0 = $4.35 / (.09 – .0550)
P0 = $124.29

The next dividend payment by Wyatt, Inc., will be $2.55 per share. The dividends are anticipated to maintain a growth rate of 6.00 percent, forever. Required: If the stock currently sells for $48.70 per share, what is the required return? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Required return % Explanation: We need to find the required return of the stock. Using the constant growth model, we can solve the equation for R. Doing so, we find: R = (D1 / P0) + g R = ($2.55 / $48.70) + .0600 R = .1124, or 11.24%

The next dividend payment by Wyatt, Inc., will be $2.55 per share. The dividends are anticipated to maintain a growth rate of 6.00 percent, forever.

Required:
If the stock currently sells for $48.70 per share, what is the required return? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

  Required return %  




Explanation:

Gore Range Carpet Cleaning is a family-owned business in Eagle-Vail, Colorado. For its services, the company has always charged a flat fee per hundred square feet of carpet cleaned. The current fee is $23.45

Gore Range Carpet Cleaning is a family-owned business in Eagle-Vail, Colorado. For its services, the company has always charged a flat fee per hundred square feet of carpet cleaned. The current fee is $23.45 per hundred square feet. However, there is some question about whether the company is actually making any money on jobs for some customers—particularly those located on more remote ranches that require considerable travel time. The owner’s daughter, home for the summer from college, has suggested investigating this question using activity-based costing. After some discussion, a simple system consisting of four activity cost pools seemed to be adequate. The activity cost pools and their activity measures appear below:

  Activity Cost Pool                Activity Measure     Activity for the Year       
  Cleaning carpets Square feet cleaned (00s) 12,000  hundred square feet  
  Travel to jobs Miles driven 130,500  miles
  Job support Number of jobs  2,000  jobs
  Other (organization-sustaining
    and idle capacity costs)
None  Not applicable


     The total cost of operating the company for the year is $350,000, which includes the following costs:

     
  Wages $ 140,000   
  Cleaning supplies   26,000   
  Cleaning equipment depreciation   7,000   
  Vehicle expenses   38,000   
  Office expenses   62,000   
  President’s compensation   77,000   
 

  Total cost $ 350,000   
 





     Resource consumption is distributed across the activities as follows:

 
Distribution of Resource Consumption Across Activities  
  Cleaning Carpets Travel to Jobs Job Support Other Total
  Wages 78 % 14 % 0 % 8 % 100 %
  Cleaning supplies 100 % 0 % 0 %  0 % 100 %
  Cleaning equipment depreciation 74 % 0 % 0 % 26 % 100 %
  Vehicle expenses 0 % 80 % 0 % 20 % 100 %
  Office expenses 0 % 0 % 55 % 45 % 100 %
  President’s compensation 0 % 0 % 29 % 71 % 100 %


Job support consists of receiving calls from potential customers at the home office, scheduling jobs, billing, resolving issues, and so on.

Required:
1.
Prepare the first-stage allocation of costs to the activity cost pools. (Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.)

           Cleaning
         Carpets
         Travel to Jobs      Job
       Support
          Other         Total
  Wages $   $   $   $   $  
  Cleaning supplies          
  Cleaning equipment depreciation          
  Vehicle expenses          
  Office expenses          
  President’s compensation          
 




  Total cost $    $   $   $   $  
 











2. Compute the activity rates for the activity cost pools. (Round your answers to 2 decimal places. Omit the "$" sign in your response.)

  Activity Cost Pool Activity Rate                                 
  Cleaning carpets $  per hundred square feet
  Travel to jobs $  per mile
  Job support $  per job


3.
The company recently completed a 4 hundred square-foot carpet-cleaning job at the Lazy Bee Ranch—a 55.00-mile round-trip from the company’s offices in Eagle-Vail. Compute the cost of this job using the activity-based costing system. (Round your intermediate and final answers to 2 decimal places. Omit the "$" sign in your response.)

  Cost        $  

4.
The revenue from the Lazy Bee Ranch was $93.80 (4 hundred square-feet at $23.45 per hundred square feet). Prepare a report showing the margin from this job. (Input all amounts as positive values except losses which should be indicated by a minus sign. Round your intermediate and final answers to 2 decimal places. Omit the "$" sign in your response.)

Gore Range Carpet Cleaning
Customer Margin—Activity-Based Costing
  Sales     $  
  Costs:    
      Cleaning carpets   $    
      Travel to jobs      
      Job support      
 

  Customer margin   $  
   




Explanation: 1.
The first-stage allocation of costs to activity cost pools appears below:

Wages:
Cleaning Carpets = 78% × $140,000 = $109,200
Travel to Jobs = 14% × $140,000 = $19,600
Job Support = 0% × $140,000 = $0
Other = 8% × $140,000= $11,200

Cleaning supplies:
Cleaning Carpets = 100% × $26,000 = $26,000
Travel to Jobs = 0% × $26,000 = $0
Job Support = 0% × $26,000 = $0
Other = 0% × $26,000 = $0

Cleaning equipment depreciation:
Cleaning Carpets = 74% × $7,000 = $5,180
Travel to Jobs = 0% × $7,000 = $0
Job Support= 0% × $7,000 = $0
Other = 26% × $7,000 = $1,820

Vehicle expenses:
Cleaning Carpets = 0% × $38,000 = $0
Travel to Jobs = 80% × $38,000 = $30,400
Job Support = 0% × $38,000 = $0
Other = 20% × $38,000 = $7,600

Office expenses:
Cleaning Carpets = 0% × $62,000 = $0
Travel to Jobs = 0% × $62,000 = $0
Job Support = 55% × $62,000 = $34,100
Other = 45% × $62,000 = $27,900

President's compensation:
Cleaning Carpets = 0% × $77,000 = $0
Travel to Jobs = 0% × $77,000 = $0
Job Support = 29% × $77,000 = $22,330
Other = 71% × $77,000 = $54,670

2.
The activity rates are computed as follows:

  Activity Cost Pool (a)
Total Cost
(b)
Total Activity
(a) ÷ (b)
Activity Rate
  Cleaning carpets $ 140,380   12,000  hundred square feet $ 11.7  per hundred square feet
  Travel to jobs $ 50,000   130,500  miles $ 0.38  per mile  
  Job support $ 56,430   2,000  jobs $ 28.22  per job


3.
The cost for the Lazy Bee Ranch job is computed as follows:

  Activity Cost Pool (a)
Activity Rate
(b)
Activity 
(a) × (b)
ABC Cost
  Cleaning carpets  $ 11.7  per hundred square feet 4  hundred square feet   $  46.8  
  Travel to jobs  $ 0.38  per mile 55  miles    20.9  
  Job support  $ 28.22  per job 1  job   28.22  
           

  Total             $ 95.92